22 Reasons The SP 500 Is Headed Below 1,050

There are numerous fundamental and technical reasons supporting a move below
1,050 on the S&P 500:

The market is fixated on the approval of the next bailout for Greece. There
is little
evidence supporting an "all clear" signal in the markets if the next
pile of money is delivered to Greece. As signaled by the bond market, Greece
is most likely headed for default.

It may only be a matter of time before the bond market turns its full attention
toward Italy. The expression, "Italy is too big to fail, but too big to bail",
says it all.

Politicians in the United States are more interested in getting re-elected
and catering to their core base than solving problems, which is an ongoing
and sad commentary on the lack of leadership in this country.

Before the dot-com bust, investors thought stocks were invincible, which
was somewhat rational since the S&P 500 went on a credit-fueled bull
run from 1982 to 2000. The NASDAQ, a recent market "leader", remains 50%
below the March 2000 peak of 5,048. Needless to say, as we enter the third
bear market in the last eleven years, investors no longer think "stocks always
go up". Consequently, they will be much less willing to listen to the self-serving
Wall Street creed of "you have to think long-term". A mass exodus from stocks
could make 2008 look like a correction.

Before the mother of all credit bubbles burst in 2008, investors believed "housing
prices can never go down." After watching their home equity evaporate before
their eyes, homeowners around the globe fully understand that asset prices,
all asset prices, fall after a credit bubble bursts.

Until very recently, investors thought the Fed was omnipotent. Yesterday's
reaction to 'Operation Twist' clearly demonstrates the investing public understands
fiddling with the money supply and shifting a bond portfolio on the deck
of the economic Titanic has significant limitations and unintended consequences.
On September
9, we noted the market's collective yawn to the Wall Street Journal headline, "Fed
Prepares to Act." This was a clear signal the markets were not excited about
'Operation Twist'.

Government bailouts and large-scale stimulus spending are a thing of the
past. The Fed and deficit spending prevented the last bear market from doing
what it wanted to, which was purge all the bad debt and businesses from the
system. We cannot hope for a repeat Fed/deficit-spending performance, meaning
this bear market could be worse. The S&P 500 could drop well below 1,050
before this bear has run its course.

The official shift from an inflationary bias to a deflationary bias occurred
on September 9. Our recent
analysis supports a deflationary shift has taken place, meaning the bias
for all asset prices is now to the downside. In this stage of the bear market,
investment options may be limited to shorting (SH), conservative bonds (TLT),
and the dollar (UUP). We own all three. The table below shows asset class
performance during a similar period in the last bear market.

Widely watched retracement levels and long-term trendlines point to possible
buying support coming in between 1,018 and 1,044 on the S&P 500 - if
we get down that far and bounce, it may offer a good time to consider covering
short positions and cutting back on defensive assets.

Emerging markets have lead markets higher countless times in the last decade
or so, including off the 1998, 2009, and 2010 lows. As we highlighted on September
12, emerging markets have been laggards for some time now, which was
a big red flag heading into Wednesday's Fed announcement.

The technical
deterioration in the European indexes points to a crisis that is just
getting started, not one that is nearing completion. The mountains of debt
and flawed structure of the euro also support that theory.

The S&P 500 needs to catch up with Europe in terms of declines. As
noted on September
13, U.S. stocks recently reached the top of a trend channel that preceded
big declines in 2008 and 2010.

Short
position data recently indicated significant downward pressure could
still be exerted on stock prices. We are not the only ones that have seen
the items listed on this page.

Stocks dropped over 50% after the technology bubble burst. Stocks dropped
over 50% after the housing bubble burst. A logical case can be made that
stocks will also drop
over 50% in the wake of the bursting of the "Fed bubble".

The lack of interest in QE2 winning assets, something we have noted numerous
times since August
31, was another deflationary red flag heading into Wednesday's Fed meeting.
Our analysis the
day before the Fed announcement also supported a bearish reaction to shifting
the Fed's balance sheet. We were short stocks (SH) and long the dollar (UUP)
heading into the 2:15 announcement, a stance that had me questioning our
sanity around 2:00 p.m.

On August
26, our ETF and asset class rankings pointed to more downside in stocks.
When the top-ranked ETFs include the VIX (VXX), a short (SH), and bonds
(BND), it means something is wrong with the long side of the market.

Even recent
action in gold and silver is leaning toward deflationary or bearish
outcomes. The gold:silver ratio remains above its 200-day and the 50-day
is above the 200-day. These are deflationary shifts since silver is the
more economically sensitive precious metal.

The parallels
to 2000 and 2008 that we presented on August 12 are still in place
and they remain concerning. Long-term sell signals are easy to find on
weekly and monthly charts.

The domino effect of crippling levels of debt will eventually impact corporate
earnings (see video in post).
There are very few, if any, safe haven stocks in a bear market.

A clear topping process has unfolded, along with a now almost-officially-failed
rally attempt. The chart below was originally presented on August
3; the version below has been updated.

The slope of the S&P 500's 200-day moving average is rolling over in
a bearish manner. The 50-day moving average is below the 200-day, which is
known as a death cross. As our research indicted on August
17, the current death cross, occurring last in an economic cycle, may
be more deadly than most.

The CCM Bull Market Sustainability Index (BMSI)
officially moved into bear market territory on September 6. On September
22 it dropped all the way down to -601, which clearly aligns with poor risk-reward
markets in the past (see table below). A risk-reward ratio below 1.00 is
unfavorable and tells us the odds favor lower lows in stocks and risk assets
in general.

We will maintain a bearish bias until fundamental (mainly Europe) and technical
conditions improve. If the S&P 500 (SPY) breaks below last Monday's low
of 1,136, we would consider adding to our deflationary/bearish stance, which
includes bonds (TLT), the dollar (UUP), and a short (SH). Since gold, silver,
and gold mining stocks may get caught in the deflationary downdraft for a time
(see "If The Dollar Continues To Rally" table above), we may sell our GDX relatively
soon.

Chris Ciovacco is the Chief Investment Officer for Ciovacco
Capital Management, LLC. More on the web at www.ciovaccocapital.com.

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